It is a firing start to the trading week as significant indices are in the green as risk on prevails. The SP500 reached a gain of 3%, breaching that psychological 3,000 mark. Although bears took some control near the end of the trading day, the sentiment was overall bullish.
I feel as though we have seen this repeatedly for the past 2 weeks. Restrictions on lock down are loosening, major central banks are providing unprecedented amounts of liquidity, and the backbone of the US economy, the consumer, is shopping again. However, recent economic data is disastrous; central bankers' words don't match the markets, and tensions between geopolitical parties have only gotten worse. Why has the market been so detached from real life recently?
With interest rates all around the world nearing 0%, institutional investors are grasping onto any positive yields in the market. It could also be due to an influx of all around the world retail investors "buying the dip". Another reason could be traders moving big lots taking advantage of the risk-on / risk-off dynamic. Whatever the case, it is evident that this risk on/risk on dynamic will continue to prevail in the markets if there is no vaccine.
The AUD/USD pair typically associated with risk on has been rallying in the past couple of weeks. With manufacturing across the world slowly starting up again, signs of economic activity have been showing. With summer arriving in a couple of days in the United States, a pick-up in oil demand is predicted to occur as Americans scratch the urge to take a holiday in a period where air travel still leaves a distaste in many peoples' mouths.
It would be reasonable to think that in times like these, where a virus had ravaged the world out of nowhere, there would be unity and cooperation between all geopolitical powers. However, it seems like China has setting many bridges on fire lately. China against the United States, Hong Kong Taiwan, Australia – is not the sign of unity. However, it is not just China throwing hands. United States cutting ties and funding with the WHO is another example of how politics gambles with regular people's lives.
As China and Hong Kong protests start up again, concerns over the future of Hong Kong become real. 3 days ago, China's parliament said that it would impose a new national security law, with Hong Kong Citizens fear that this may be the last straw before the freedom that they have had enjoyed under colonial the United Kingdom's colonial rule. A Hong Kong expert at the Shanghai Institutes for international studies, Zhang Jian, told the Financial times that the national security law "Will reignite the protests but that's not a reason to give up [with regards to Xi's power move into Hong Kong] ".
We have yet to see an ounce of certainty in the past two weeks. Traders should be cautious and keep an eye out on any news that may fundamentally affect their trading strategy.
Andre Almeida has brilliant analysis technical on USD/CAD. You can watch it here.
Gold reached an all-time high earlier this week as it cleared the $1,750 level. It was able to reach bids at $1,765 before the US trading station started for the week. However, this rally was not sustainable as Risk on prevailed. This was due to Moderna reporting positive data on their early-stage Coronavirus vaccine trial.
Gold retracted back down to $1,725 today as Risk on sentiment prevails in the market. This has been most notable in the oil market. Both WTI and Brent Crude reach highs since the start of the Coronavirus breaching $34 and $37, respectively. This is on demand for oil slowly picking up across the world, alongside supply cuts materially taking into effect. Furthermore, both commodities have been susceptible to the Risk on / Risk off dynamic that has been playing out in the markets recently. Alongside this, the SP500 has been stuck in a consolidation zone since the end of April. This is due to Investors / Traders gripping onto any good news with regards to any advancements to Coronavirus vaccines.
Gold has been experiencing similar consolidation patterns as market sentiment shows genuine uncertainty with the future of the economy. Therefore, this creates strong support and resistance lines within the consolidation zones that traders may trade with reliability. A breach of these supports and resistance may show strong positive/negative news with regards to Coronavirus vaccines. Therefore, on quieter news days, traders may use these support and resistance lines for hourly and 4 hourly reversals.
However, fundamentally we may see a retest of the $1,750 level again. Tensions between the United States, Australia, and Hong Kong towards China have slowly been increasing with regards to trade. Furthermore, the possibility of a second wave is still not out of the question, with many more disappointing results with regards to Coronavirus trials being likely. However, CEO Pascal Soriot of AstraZeneca, stated that they are confident that there is a good reason for vaccine trials to work.
Are you bullish on Gold?
Its risk on to the start of the US trading week as promising vaccine results amongst a resurrection in Chinese oil demand send equities and oil soaring.
The SP500 is up near 3% on the back of Moderna, stating that their Coronavirus vaccine tests yielded signs it could make an immune response system in the body. As many countries start to ease restrictions on their citizens, hopes in a demand recovery have investors dipping their toes into risk-on assets. Amongst the 94% of winners recording gains today, JETS, an ETF that tracks US airlines and airline manufacturers, is up 11.6% in the risk-on rally. However, they are still down around 58% for the year.
This risk-on rally may be short-lived; however, as market participants take any good news with regards to a vaccine as a reason to invest / trade. Jeffrey Kleintop told Bloomberg that “the market is very tied to measuring the success of these economic reopenings” and that “a successful vaccine would really make those reopenings very successful,” casting doubt about the risk on rally until a vaccine is fully developed. Furthermore, Fed Chairman Jerome Powell also casts some doubts on a recovery, stating that the US should “recovery steadily through the second half of this year” if US is able to avoid a “second wave of the coronavirus.” He has assured that the Fed has enough ammunition to help support the United States, with the Fed preparing to lend to middle-market businesses, allowing the central bank to extend up to $600 Billion in loans if required.
In the Commodities market, Crude breaks $35, and WTI contango closes. This is most likely on evidence pointing to Chinese demand reaching pre-coronavirus levels amongst ease in storage concerns and lockdown restrictions. Alongside previous Google mobility data showing tentative evidence of an increase in car usage, new evidence from TomTom’s traffic index showing rush hour traffic in Chinese cities at pre-coronavirus levels or above. With OPEC making good on supply cuts, an imbalance in demand eclipsing supply may push oil prices higher. However, it is not all positive for oil, as demand for jet fuel remains low, with many countries continuing with strict border restrictions even after lockdowns are lifted. Furthermore, it is worth noting that Jet fuel makes up around 8% of oil consumption globally, while gasoline makes up around 23%. Countries forming “mini bubbles” with other countries may slowly bring the demand for Jet fuel up.
The markets have been itching to buy the dip on any positive consensus. However, rallies in risk-on assets may be short-lived as a second wave is not out of the question given a vaccine is still months away.
Are you joining this risk-on rally?
Senior Analysts here at Blackbull Markets Phillip van den Berg and Andre Almeida have released some tremendous technical analysis on the Dow Jones rally and the USD/CAD, respectively. You can watch the videos here and here.